In brief - Direct functional relevance test set by Court's decision

The Federal Court has narrowed the meaning of active asset for the small business capital gains tax (CGT) concessions by introducing a "direct functional relevance" test in Commissioner of Taxation v Eichmann [2019] FCA 2155.

Mr Eichmann and his spouse owned a property adjacent to their home which they sold. The property was used in a building, bricklaying and paving business carried on by the trustee of a trust that was controlled by Mr Eichmann and his spouse.

The property had two sheds, a high block wall and a gate to secure the property. There was no business signage on the property.

The property was used to store tools, equipment and materials. The items stored included bricks, blocks, pavers, mixers, wheel barrows, drums, scaffolding and iron. Work vehicles and trailers were parked on the property. Tools and other items were collected daily and in some cases the property was visited a number of times of day between jobs. Occasionally, some preparatory work was undertaken on the property.

Mr Eichmann applied for a private ruling from the Commissioner about the application of the small business CGT concessions to the sale of the property.

The Commissioner ruled that the concessions were not available because the property was not an active asset. The definition of active asset requires that the asset be used, or held ready for use, in the course of carrying on a business.

Mr Eichmann objected to the private ruling and the objection was rejected. He then sought review of the objection decision in the Administrative Appeals Tribunal (AAT). The AAT allowed the review and rejected the Commissioner's submission that the definition of active asset required the use of the asset to be integral to the process by which the business was carried on. It found that the use of the property was not trivial or insignificant and that was sufficient for it to be an active asset.

Federal Court upholds Commissioner's appeal

The Commissioner appealed to the Federal Court and the appeal was upheld.

The Federal Court found that for an asset to be used in the course of carrying on a business:

  • the use must have a direct functional relevance to the carrying on of the normal day-to-day activities of the business, and the use must be a constituent part or component of those activities

  • it is not sufficient that the use of the asset has some connection with the business but it is not necessary that the use of the asset be integral to the business activities

  • the whole, or predominantly the whole, of the asset must be used in the course of carrying on the business

The Federal Court decided that the use of the property was preparatory to the undertaking of the business activities. Those activities mainly occurred on the work sites where services were provided. The use did not have a direct functional relevance to the carrying on of a building, bricklaying and paving business.

The decision would seem to apply to other businesses that use property solely for the purpose of storing equipment and materials which are used to provide services, such as earthmoving, landscaping, waste management and other construction services.

This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2020.